EMPLOYEE COMPENSATION

Photo by: Aptyp_koK

Compensation is a primary motivator for employees. People look for jobs
that not only suit their creativity and talents, but compensate
them—both in terms of salary and other benefits—accordingly.
Compensation is also one of the fastest changing fields in Human
Resources, as companies continue to investigate various ways of rewarding
employees for performance.

DETERMINING WAGES AND SALARIES

It is important for small business owners to understand the difference
between wages and salaries. A wage is based on hours worked. Employees who
receive a wage are often called "non-exempt." A salary is an
amount paid for a particular job, regardless of hours worked, and these
employees are called "exempt." The difference between the
two is carefully defined by the type of position and the kinds of tasks
that employees perform. In general, exempt employees include executives,
administrative and professional employees, and others as defined by the
Fair Labor Standards Act of 1938. These groups are not covered by minimum
wage provisions. Non-exempt employees are covered by minimum wage as well
as other provisions.

It is important to pay careful attention to these definitions when
determining whether an individual is to receive a wage or a salary.
Improper classification of a position can not only pose legal problems,
but often results in employee dissatisfaction, especially if the employee
believes that execution of the responsibilities and duties of the position
warrant greater compensation than is currently awarded.

When setting the level of an employee's monetary compensation,
several factors must be considered. First and foremost, wages must be set
high enough to motivate and attract good employees. They must also be
equitable—that is, the wage must accurately reflect the value of
the labor performed. In order to determine salaries or wages that are both
equitable for employees and sustainable for companies, businesses must
first make certain that they understand the responsibilities and
requirements of the position under review. The next step is to review
prevailing rates and classifications for similar jobs. This process
requires research of the competitive rate for a particular job within a
given geographical area. Wage surveys can be helpful in defining wage and
salary structures, but these should be undertaken by a professional (when
possible) to achieve the most accurate results. In addition, professional
wage surveys can sometimes be found through local employment bureaus or in
the pages of trade publications. Job analysis not only helps to set wages
and salaries, but ties into several other Human Resource functions such as
hiring, training, and performance appraisal. As the job is defined, a wage
can be determined and the needs for hiring and training can be evaluated.
The evaluation criteria for performance appraisal can also be constructed
as the specific responsibilities of a position are defined.

Other factors to consider when settling on a salary for a position
include:

Availability of people capable of fulfilling the obligations and
responsibilities of the job

Level of demand elsewhere in the community and/or industry for
prospective employees

Cost of living in the area

Attractiveness of the community in which the company operates

Compensation levels already in existence elsewhere in the company

COMPENSATION LAWS

There are many federal, state, and local employment and tax laws that
impact compensation. These laws define certain aspects of pay, influence
how much pay a person may receive, and shape general benefits plans.

The
Fair Labor Standards Act (FLSA)
is probably the most important piece of compensation legislation. Small
business owners should be thoroughly familiar with it. This act contains
five major compensation laws governing minimum wage, overtime pay, equal
pay, recordkeeping requirement, and child labor, and it has been amended
on several occasions over the years. Most of the regulations set out in
the FLSA impact non-exempt employees, but this is not true across the
board.

The
Equal Pay Act of 1963
is an amendment to FLSA, which prohibits differences in compensation
based on sex for men and women in the same workplace whose jobs are
similar. It does not prohibit seniority systems, merit systems, or systems
that pay for performance, and it does not consider exempt or non-exempt
status.

In addition, the United States government has passed several other laws
that have had an impact, in one way or another, on compensation issues.
These include the
Consumer Credit Protection Act of 1968
, which deals with wage garnishments; the
Employee Retirement Income Security Act of 1974 (ERISA
), which regulates pension programs; the Old Age, Survivors, Disability
and Health Insurance Program (OASDHI), which forms the basis for most
benefits
programs; and implementation of unemployment insurance, equal employment,
worker's comp, Social Security, Medicare, and Medicaid programs and
laws.

TRADITIONAL COMPENSATION

For the most part, traditional methods of compensation involve set pay
levels (wage or salary) with regular increases. Increases can be given for
a variety of reasons, but are typically given for promotions, merit
increases, or cost of living increases. The Hay Group points out that
there is less distinction today between merit increases and cost of living
increases: "Because of the low levels (3 to 4 percent) of salary
budget funding, most merit raises are perceived as little more than cost
of living increases. Employees have come to expect them." This
"base pay" system is one that most people are familiar with.
Often, it includes a set salary or wage, a set schedule for merit
increases, and a set benefits package.

BENEFITS

Benefits are an important part of an employee's total compensation
package. Benefits packages became popular after World War II, when wage
controls made it more difficult to give competitive salaries. Benefits
were added to monetary compensation to attract, retain, and motivate
employees, and they still perform that function today. They are not cash
rewards, but they do have monetary value (for example, spiraling health
care costs make health benefits particularly essential to today's
families). Many of these benefits are nontaxable to the employee and
deductible by the employer.

Many benefits are not required by law, but are nonetheless common in total
compensation packages. These include health insurance, accidental death
and dismemberment insurance, some form of retirement plan (including
profit-sharing, stock option programs, 401(k) and employee stock ownership
plans), vacation and holiday pay, and sick leave. Companies may also offer
various services, such as day care, to employees, either free or at a
reduced cost. It is also common to provide employees with discounted
services or products offered by the company itself. In addition, there are
also certain benefits that
are
required by either state or federal law. Federal law, for example,
requires the employer to pay into Social Security, and unemployment
insurance is mandated under OASDHI. State laws govern worker's
compensation.

CHANGES IN COMPENSATION SYSTEMS

As businesses change their focus, their approach to compensation must
change as well. Traditional compensation methods may hold a company back
from adequately rewarding its best workers. When compensation is tied to a
base salary and a position, there is little flexibility in the reward
system. Some new compensation systems, on the other hand, focus on reward
for skills and performance, with the work force sharing in company profit
or loss. One core belief of new compensation policies is that as employees
become employee owners, they are likely to work harder to ensure the
success of the company. Indeed, programs that promote employee
ownership—and thus employee responsibility and emotional
investment—are becoming increasingly popular. Examples of these
types of programs include gain sharing, in which employees earn bonuses by
finding ways to save the company money; pay for knowledge, in which
compensation is based on job knowledge and skill rather than on position
(and in which employees can increase base pay by learning a variety of
jobs); and incentive plans such as employee stock options plans (ESOPs).

PAY FOR PERFORMANCE
Probably the most popular of the newer concepts in compensation is the
easiest to understand—compensation based on performance. These
programs, sometimes referred to as variable pay programs, generally offer
compensation incentives based on employee performance or on the
performance of a team. Pay for performance rewards high performance and
does not reward mediocre or low performance, and is the definition of the
"merit" system.

In a true merit based system, there are a few conditions which must be
satisfied for it to be meaningful:

Employees must have control over their performance. If employees are
overly dependent on the actions and output of other employees or
processes, they may have little control over their own performance.

Differences in performance must mean something to the business. If there
is little difference between a high performer and a mediocre one, merit
pay won't work.

Performance must be measured regularly and reliably. A clear system of
performance appraisal, with defined criteria that are understood by the
employee and regularly scheduled meetings must be in place.

ADMINISTERING COMPENSATION PROGRAMS

Compensation programs and policies must be communicated clearly and
thoroughly to employees. Employees naturally want to have a clear
understanding of what they can reasonably expect in terms of compensation
(both in terms of monetary compensation
and benefits) and performance appraisal. To ensure that this takes place,
consultants urge business owners to detail all aspects of their
compensation programs in writing. Taking this step not only helps reassure
employees, but also provides the owner with additional legal protection
from unfair labor practices accusations.